Money Holdings, Inflation, and Welfare in a Competitive Market

Abstract:     
This article examines an environment where money is essential and agents exchange in perfectly competitive, Walrasian markets. Agents consume and produce a homogeneous good, but hold money to purchase consumption in the event of a relatively low productivity shock. A Walrasian market delivers a nondegenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market assumption of bilateral bargaining common to search-theoretic environments. The model is calibrated to long-run U.S. velocity, and the welfare costs of inflation are assessed for variable buyer-seller ratios and persistent states of buying and selling.

Number of Pages in PDF File: 17

Accepted Paper Series